Define book keeping

Bookkeeping

Bookkeeping is the art of recording financial business transactions in a set of books in terms of money or money worth.

The recording of things owned by business and money owned to suppliers and others and how these things change from day today, is known as book-keeping. Without bookkeeping records an owner would simply not be able to keep track of financial affairs of business. This would soon lead to the business getting into a considerable mess.

Common terms used in book-keeping

There are several common terms used in the subject of book-keeping. The following is a list of common terms used:

Business

It is any legal activity undertaken with the aim of making profit. Examples of business include farming, a restaurant, a salon, and a kiosk.

Capital

It is the amount of money or money's worth provided by the owner to start an enterprise or to expand it. The money contributed by the owner can be used to finance business operations, or grow and expand the business.

Sole proprietor

A sole proprietor, also known as a business person, is the owner of an enterprise who provides capital to start or expand the enterprise. The sole proprietorship is the form of business enterprises that is owned by one person. In most cases, sole proprietorship is a family business and is the easiest type of business to establish and operate because it is not highly regulated by the government.

Goods

These are items bought and sold by the proprietor; and they have the characteristics of being seen and touched. Goods are sold by business people to satisfy the needs of customers. Examples of goods include pens, exercise books, hats, food, mobile phones, and clothes.

Services

These are activities served or provided by an enterprise in the course of the business but the activities are neither seen nor touched. Examples of services offered by enterprise are hairdressing, drama, advertising, and training.

Profit

It is the result achieved by the business when revenues are greater than expenses. In other words, profit is the excess of revenue over expenses. Generally, the goal of every enterprise is to make profit.

Loss

A business is said to have made a loss when expenses are greater than revenues. A loss is not desired by any enterprise because it reduces the amount of capital of such enterprises.

Transaction

A transaction is a business event that has monetary impact on business financial statements, and is recorded as an entry in its accounting record. It also refers to the movement of money or money's worth between two or more parties. For example, Juma paid Paula TZS 20,000 to buy a pair of shoes. This is a transaction because TZS 20,000 have been transferred from Juma to Paula and at the same time the pair of shoes has been transferred from Paula to Juma.

Debtor

This term refers to a customer who buys goods or services from an enterprise on credit. Thus, a debtor is a person who owes money, that is, has an obligation to the business. The amounts receivable from the debtors of the enterprise is an asset to such enterprise and is treated as a current asset in the statement of financial position. The other name for a debtor is accounts receivable.

Creditor

This refers to a person who sells goods or renders services on credit to an enterprise. Therefore, a creditor is a person to whom the enterprise owes money. The amounts payable to creditors of the enterprise is a liability to that enterprise and is treated as a current liability in the statement of financial position. The other name for a creditor is accounts payable.

The importance of book-keeping

Book-keeping is important to business owners and other parties outside of an enterprise for the following reasons:

1. Determination of profits Book-keeping helps a business to determine whether it is making a profit or a loss. This is possible because book-keeping helps an enterprise to keep complete, accurate and up-to-date financial records. If we take an example of Misosi-poa above, book-keeping will assist the business to calculate profits or losses made for the year from the food vending business.

2. Knowledge of credit transactions Many businesses are conducted both on cash and credit basis. Misosi-poa, for example, would sell most of its food for cash, but it would occasionally sell to some customers on credit, who promise to pay for the food later. Similarly, it is possible that Misosi-poa buys some of its raw foods on credit from the market. In practice, many businesses have a significant volume of their transactions conducted on credit. Book-keeping helps enterprises to maintain appropriate records of their credit transactions and know the amount due from each of its debtors and the amount owing to each of its creditors since such records can systematically be kept following book-keeping principles.

3. Control of business To have an effective control of a business, the owner of the business needs to keep proper records of her financial matters. These records, in the long run, help the owner or proprietor to decide on matters such as expansion or reduction of the business. If Misosi-poa sells breakfast, lunch and dinner; appropriate record keeping may assist in deciding on the effort to dedicate to each of the menus. Additionally, in case the food is sold from more than one location or centre; book-keeping may suggest whether the volume in one or another centre may need to be expanded or reduced according to the sales records. Book-keeping can also help the proprietor to detect errors, fraud, and any misappropriation of funds. This can be useful in making a decision on the corrective measures to be taken where necessary.

4. Determination of business's financial position Book-keeping helps the owner to determine the financial position of his or her enterprise. It enables him or her to understand the value of assets, liabilities, and the amount of capital contributed by the owner. This can be useful in establishing whether the business has grown or not. Knowing the financial position of a business can also assist in case it needs to apply for a bank loan for expanding its operations.

5. Tax assessment Tax authorities such as the Tanzania Revenue Authority (TRA) and Zanzibar Revenue Board (ZRB) need to see and examine the books of accounts of every enterprise operating in the United Republic of Tanzania. This is important in calculating the amount of tax that should be paid by the enterprises. Thus, a proper keeping of financial records helps both the owner and tax authorities to assess the amount of tax payable. Tax laws in Tanzania also penalise businesses that do not maintain financial documents and records properly. Book-keeping therefore, may help the business save money that would otherwise be paid as a penalty for not maintaining financial records.